Egypt Independent

Institutional reform, wealth distribution necessary for Egypt’s economic growth



The Middle East and North Africa region must focus on opening regional economies and strengthening state institutions in the wake of massive political upheavals, according to economic analysts.

The consensus came from a gathering of more than 160 experts and researchers at the 17th annual conference of the Cairo-based Economic Research Forum (ERF) in Antalya, Turkey from 20-23 March.

“These institutions must work on closing the divergent gap between stated and applied policy,” said Lant Pritchett, a Harvard economist.
 
Inefficiency within government institutions in the region has hampered the operational capacity of state programs, according to the economists. But some argued economic policy can either be constrained or reinforced by good institutions.
 
“There are many democracies with bad governance who do not achieve [stated] economic goals, such as India,” said Mustapha Nabli, governor of the Central Bank of Tunisia.  
 
Others disagree that democracy and governance are mutually exclusive, saying countries such as Egypt and Tunisia must work to bolster good institutions while reforming dysfunctional ones.
 
“What matters now, before deciding on what economic model to adopt, is to have open institutions,” said Harvard economist James Robinson. “The people in Tahrir Square were rebelling against political and economic institutions that kept that repressed.”
 
Robinson presented his theory that countries typically reach a state he calls "virtuous cycle,” which happens when both political and economic institutions are inclusive. A "vicious cycle" tends to occur when the political and economic institutions are exploitative rather than inclusive, he said.
 
Egypt attempted economic reform while having a politically oppressive regime — a formula that usually doesn't work, Robinson said. 
 
“Egypt has to get the political settlement right, make sure the old system does not reinvent itself in the coming government, and economics will sort itself out,” Robinson said.
 
The World Bank’s Hoda Youssef argued that alleviating state oppression is the most prudent economic policy.
 
“The bulk of the institutional reform in Egypt is related to the creation of the conditions that enable a more dynamic private sector to emerge,” said Youssef, who presented her working paper with co-author Hoda Selim.
 
ERF Managing Director Ahmed Galal praised researchers at the conference, saying the papers presented showed an “exponential increase” in quality.
 
“I think the direction for ERF and groups like it in the coming period will be political economy and policy formation, it is what the Arab World needs now,” said Samir Makdisi of the American University of Beirut.
 
The failure of many economists to predict the magnitude of the situation in the Arab World, some argued, underlines recent shortcomings.
 
“Economics became too technical and quantitative,” said ERF Fellow Ahmed Ghonim of Cairo University. Ghonim believes Egyptian economists must approach policy recommendations from an interdisciplinary perspective.
 
ERF Fellow Ishak Diwan of the World Bank said economists can no longer be “economistic” in their approach. He called on the ERF and his colleagues to reconnect with political scientists.
 
“Right now we need to also be transparent and help people understand the reality of our economic situation,” said Ghonim.
 
With most economists predicting short-term losses and many restive populations in the region demanding immediate change, there is a constant need for input from specialists.
 
“It is most important for everyone to understand that every time a country with above average growth, like Egypt or Tunisia, experienced this sort of fundamental shift, the economy decelerated in the short run,” said Pritchett, the Harvard economist.
 
Much of the Arab World has experienced above average growth rates, as exemplified by Egypt’s 6-percent growth in recent years. At the same time, the region has one of the world's highest rates of youth unemployment at 25 percent.  
 
“Development and wealth distribution have become inseparable,” said ERF Advisory Committee member and Dubai Economic Council Chairman Ibrahim Badawi.
 
Makdisi, a former Lebanese Finance Minister, said he believes collusion between power and business is central to many economic problems in the region. Echoing the statements of many demonstrators and academics alike, he argued that the vitriol on Arab streets is due to unaccountable governments and a population unable to express itself publicly.  
 
“The lack of checks and balances and our democracy deficit is very much to blame,” he said. “That is more accountable for the economic state of some Arab countries than any historical, religious and modernization factors.”